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Why our pension scheme is too generous

Peter Martin

So concerned was the Rudd government about the costs faced by pensioners that in 2009 it asked the Bureau of Statistics to construct a special age pensioner cost of living index.

The bureau discovered that pensioners spent only one-third as much as Australians in jobs and spent it differently. A much greater proportion went on food and health; a much lower proportion on education and housing and less on clothes and transport (without the need to travel to work).

In the 4½ years since, the age pensioner cost index of living has climbed 14 per cent, slightly more than the consumer price index, which rose 13 per cent.

But the pension itself has climbed 25 per cent. The figure includes the base rate, the pension supplement and the clean energy supplement.

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The automatic increases are the envy of less-fortunate Australians on Newstart, Youth Allowance, Austudy and many on wages.

The pension climbs each March and September in line with male total average weekly earnings (except for those rare occasions when the CPI or pensioner index increases by more, and then it goes up by that figure).

The reference to male earnings is an anachronism. When then prime minister Gough Whitlam first raised the idea of a link to wages in the 1970s, the only wage figures collected were for men.

And Whitlam didn’t suggest automatic increases in line with wages. That came later. All Whitlam did was to use male wages as a reference point, pick a figure and allow it to be adjusted in line with prices.

Society might well want to do that from time to time, especially when the budget can afford it. But it is hard to see why it should automatically give pensioners an ever-increasing purchasing power it denies to others.

The Howard government’s commission of audit suggested he abandon automatic increases altogether, replacing them with regular reviews. If Howard didn’t agree, it said, he should only permit regular cost of living increases, “with other adjustments to be the subject of periodic review in light of budget circumstances”.

The Rolls-Royce treatment doesn't stop at indexation. So easy is it to get at least a part pension that 70 to 80 per cent of the mature age population passes the test.

Included are couples earning $70,000 (untaxed if it's from super) with up to $1.1 million in assets, plus their "family home" which they are allowed to expand or upgrade knowing it won’t be caught in the assets test.

Anyone who fails this test is by definition well off. But the well off aren’t left out. About half of them get the seniors supplement and Commonwealth health card, which entitles them to cheaper prescriptions. There’s no assets test, millionaires can get it. There is an income test, but it comes with a hole. Singles with more than $50,000 and couples with more than $80,000 in taxable income can’t get the card. But income from superannuation isn’t taxable, so it isn’t counted. It is possible to receive $200,000 a year from super (plus $50,000 in other income) and still get the card. Almost certainly an unintended consequence, it makes a joke of the tight rules that apply to younger Australians who actually need help.

The number crunching firm Macroeconomics reckons the government could save $900 million a year if it indexed the pension in the same way as other benefits. The total would rise by an extra $900 million each year, and not a single pensioner would be able to buy any less.

Including expensive family homes in the pension assets test (worth more than $1 million) would save the budget $1.1 billion a year.

Abolishing the seniors supplement would save $2 billion a year if the associated special carbon tax compensation went at the same time.

And the government could save what would eventually be $12 billion a year in today’s dollars if it bowed to the inevitable and lifted the pension and superannuation access age to 70.

When the male pension age was first set at 65 about the turn of the last century, it was rare to live much beyond 80. The Productivity Commission believes the typical male born today will live until 92 – that’s a quarter of a century on the pension if the age stops at 67.

The Grattan Institute wants to accelerate and extend that target to achieve an access age of 70 by 2025. After that it would climb further with life expectancy, at about half the pace.

Working until 70 won’t be for everybody, especially those incapacitated by manual labour. But working until 65 isn’t either. Where work wasn’t possible the Grattan Institute would allow early access.

Our pension scheme is recklessly generous. There’s every sign the government will rein it back in. When the budget position improves, perhaps it can do more. But it will probably find better uses for its funds.

Peter Martin is economics editor of The Age

212 comments so far

Until politicians change their retirement age to the same as the rest of us I am not listening and will fight all the way. Sure means test more but how dare Hockey stand there and tell me the age of entitlement is over, we all must carry the burden blah blah when he knows very well if he decided today to resign he can access his superannuation for life. What heavy lifting is he doing? Breathtaking Hypocrisy - it make me bloody furious.

Commenter

WRE

Date and time

April 15, 2014, 4:50AM

Totally agree. Let's see the pollies lead by example. Most don't even work beyond the age of 50 before they pick up entitlements for life.

Commenter

Trickster

Date and time

April 15, 2014, 5:08AM

WRE, you said it all.

Commenter

Rory the Red

Location

Sydney

Date and time

April 15, 2014, 5:10AM

The next thing will be that we will have to pay for all our medication and if that happens many will just die.I guess that is one way of getting rid of a generation who have worked very hard all their lives, paid their taxes, do not much super but saved and gone without to buy their home (which has now risen in value). People keep going on about the Baby boomers - how about the ones who have never worked, people who have received payments of one sort or another and then just moved onto a pension. They have not paid any taxes.

Commenter

Anne

Location

Sydney

Date and time

April 15, 2014, 5:16AM

Yes, let the federal politicians lead by example. The age of entitlement is O-V-E-R for you too, Mr Hockey et al.

Commenter

Mardi

Location

Tuggeranong

Date and time

April 15, 2014, 5:21AM

It would also help if politicians perks were canceled, and tax payer funded electoral payments and reimbursements were stopped

Commenter

rastus

Date and time

April 15, 2014, 5:28AM

@WRE - Hockey meant that OUR age of entitlement was over, not that of his and his party. They need to steal from the poorest in order to maintain the lifestyle that they have all become so accustomed to.

Commenter

JJ

Date and time

April 15, 2014, 5:40AM

I'm with you, WRE. It is sheer hypocrisy. They are normal people like the rest of us - and should be treated that way!

Commenter

Jump

Date and time

April 15, 2014, 5:51AM

so called pensioners are rorting the system from top to tail. If you are so hard up for cash sell your million dollar houses in Malvern. as a person who pays more more tax than most earn in a year and never receiving a red cent I am sick of these people holding every government to ransom. funny thing is they are so rusted on they will vote liberal again anyway. Next on agenda is negative gearing, the second biggest rort. you never know the liberals may get the genX vote if they target both.

Commenter

harry

Location

melbourne

Date and time

April 15, 2014, 5:52AM

Well put WRE. I was going to say exactly that in another article's comments but held off. You express my exact thoughts.The LNP should not have pandered to it's business mates over the years and reduced the %'age of super socked away. The projected impact of aged pensions on the budget would be substantially less if super was at 15% from about 1992 (?). Breathtaking hypocrisy indeed. The bloody hide of the man!